Another of the UK’s largest pension funds, the Railways Pension Scheme which provides pensions to workers from the UK’s privatised rail industry and has net assets of over £20 billion, has made an allocation to reinsurance in the last year or so.
The Railways Pension Scheme’s annual report for 2013 details a shift in investment strategy, with a focus in part of its investments to target a return of 5% above inflation while providing a diversified source of investment income to complement its equities strategy.
This is where the allocation to reinsurance sits, providing a valuable diversifier for the pension fund, with low-correlation to the rest of its investment portfolio.
The pension fund operates a risk strategy, where it takes into account the volatility of asset classes and switches in and out of them as they meet its risk budgets. With reinsurance and insurance-linked investments and ILS generally having a relatively low volatility over the longer-term it is likely that the reinsurance allocation could remain part of its strategy going forwards.
The size of the allocation to reinsurance is not detailed, neither is the name of the specific manager obvious in the report. Two investment managers named in its report which run reinsurance and ILS investment funds are Credit Suisse and AQR Capital Management, so it could well be one of the two who received the mandate from the Railways Pension Scheme in 2013.
Pension fund investors like this appreciate reinsurance linked investments and ILS as a long-term, diversifying and low-correlating growth asset, which over a longer investment horizon can provide an attractive return beating its targets, perhaps more reliably than many other asset classes.
As such inserting a small allocation to ILS and reinsurance into a massive pension fund portfolio like this provides asset reurn qualities that make sticking with the asset class very compelling. This is why large pension funds are expected to stick with ILS and reinsurance even though rates and returns have decreased, as the returns still meet their expectations and targets and the qualities of a diversifying asset class make the slightly lower return still attractive.
Read our article on the attraction of insurance-linked investments: ILS and cat bond investors. Yield hungry? Or seeking asset qualities?
Hat tip to IPE as the source.